Hedge Funds: M&A Target?

Traditional asset managers want to tap into alternative assets to broaden the services they can offer to investors. More often than not, this leads them to acquire hedge funds, recruit hedge fund managers or incubate new hedge funds inside their firms. Often, buying outside talent through an acquisition is the fastest and most efficient way to grow a hedge fund business, says Ben Phillips, managing director at Putnam Lovell.

This trend was illustrated twofold last week. On April 26, Sparx Asset Management, a giant money-management fund in Japan, announced the acquisition of Hong Kong-based hedge fund PMA Capital Management for $226 million. As a result of the deal, Sparx, which already runs approximately $8 billion in hedge funds assets, will become the biggest alternative-investment player in Asia. And Asia is where a lot of the growth in hedge funds is now taking place.

On the same day, Pioneer Investments, a $200 billion global-asset-management firm, bought Vanderbilt Capital Advisors, a $13 billion hedge fund located in Boston.

Other deals are sure to follow. Morgan Stanley is pursuing its goal to acquire a hedge fund and is talking to a variety of different alternative shops for a possible acquisition, says a source familiar with the firm's plans. John Mack, Morgan Stanley's chairman, was recently talking to hedge fund manager FrontPoint Partners, but the negotiations have come to a standstill after the defection of one of FrontPoint's key traders, as previously reported in this column.

There is no doubt that the pressure to make alternative products available through traditional money managers comes from investors. "Traditional asset managers have institutional clients, particularly pensions that desperately need absolute returns that will give them steady streams of income," says Phillips. But individual investors are also a factor, he adds. "Many boomers may say, 'I don't want a mutual fund growing at 10% with a loss every five years; give me 7% per year no matter what.' "